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Greece has successfully eliminated its extraordinarily high fiscal and current account deficits, and restored growth. It must now take action to address crisis legacies and boost inclusive growth, says the IMF in its annual health check of the country’s economy.

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As the Fund publishes its annual report on the state of the Greek economy,
IMF Country Focus sat down with Peter Dohlman, the country’s mission chief,
to discuss the report’s overall findings, key recommendations that could
help lift the country’s growth prospects and living standards, and the
Fund’s future relationship with Greece.

Greece has come to the end of its program engagement with the IMF. What
has Greece accomplished during that time?

Before I answer your question, let me express my sincere condolences for
the recent wildfire tragedy that has hit the Attica region of Greece.

Turning to your question, Greececan point to many successes. It
has eliminated its extraordinarily high fiscal deficits (from a deficit of
15 percent of GDP in 2009 to a surplus of just over one percent in 2017)
and brought its external transactions, its current account, into near
balance. Doing this required some difficult decisions including pension and
tax reforms, and improvements in public administration, such as a more
independent revenue administration.

At the same time, Greece has put in place better social safety nets, such
as the Social Solidarity Income. Greece has also made its labor markets
more flexible and wages more competitive.

In product and service markets, many sectors were liberalized in line with the
recommendations of the Organisation of Economic Cooperation and Development, the investment licensing framework became more
business-friendly, and competition barriers were removed for several closed
professions.

Most recently, Greece has put in place an important legal toolkit to help
resolve nonperforming loans, which is essential to make banks healthy
again. These efforts, along with better external conditions and other
factors, have restored growth, and we expect economic growth and job
creation to accelerate over the medium term. The government has also
re-accessed capital markets, though so far, largely for liability
management operations.

The IMF’s Stand-By Arrangement, approved in principle, was never
activated. Does this mean Greece did not implement sufficient reforms?

The arrangement to support the authorities’ economic adjustment program was
approved in principle, and was to become effective once the Fund received
specific and credible assurances from Greece’s European partners to ensure
debt sustainability, and provided that Greece’s economic program remained
on track.

Although sufficient assurances on debt relief did not emerge in time, the
agreement nonetheless helped provide confidence to creditors to disburse to
Greece and close the second review of the European Stability Mechanism program in July 2017.

It also provided a good framework for us to closely coordinate with Greece
and the european institutions on policies, and strengthened traction.

Following its hard-won recovery, is the country now out of the woods?

While much has been achieved, Greece faces very significant crisis
legacies. Prominent examples are the extraordinarily high levels of public
debt, nonperforming loans, unemployment, and high poverty rates.

Greece needs to address these legacies while also achieving sustainable
higher growth and remaining competitive in the euro area. In our staff
report, we call for rebalancing fiscal policy to better support growth and
to strengthen social safety nets, strengthening more aggressively bank
balance sheets to restore lending, and taking further steps to boost
productivity and enhance governance. Greece will need to continue to protect social and investment spending working within the high surplus targets agreed between Greece and european institutions.

How will the Fund stay involved?

As with all members of the Fund, we will continue to conduct our annual
health check of the economy, that is, the Article IV Consultation, which
entails comprehensive discussions with the Greek authorities about the full
gamut of economic policies. The Fund also engages in Post-Program Monitoring of countries that finish their program engagement with high
remaining repayments to us, and so our interactions with the authorities
will be more frequent than the annual Article IV cycle.

In this context, we will report to our Executive Board twice a year,
through the Article IV consultations process and Post-Program Monitoring,
followed by publication of our findings. In undertaking these activities,
we will work together with the European institutions.

A substantial share of our interaction with Greece in recent years has
taken the form of technical assistance, and we anticipate continuing this
engagement, at the authorities’ request, in targeted areas such as revenue
administration and public financial management.

Greece’s debt is still very high. Is the debt relief from Greece’s
European partners sufficient?

The debt relief recently agreed with European partners, combined with a large cash buffer, and the
fact that most of Greece’s public debt is low interest official sector
debt, greatly strengthens Greece’s prospects to sustain market access over
the medium term.

However, as the official sector debt matures and is replaced by more
expensive market debt, Greece’s ability to service its debt will gradually
become more challenging. Greece will need to simultaneously achieve high
GDP growth and run large primary fiscal surpluses for many years to keep
public debt on a downward trajectory.

The commitment of European partners to provide additional relief if needed,
following a review in 2032, provides for an important safety net in this
regard.

There has been much discussion about the sharp pension cuts, which the
government has applied as part of the loan program. Why are these
necessary?

The pre-legislated measures that will come into force in 2019 represent
another key step towards inclusive growth. They will not change the level
of overall government fiscal balance, but will help to improve the balance
between pension spending, targeted social support (including to low-income
households and the unemployed), and investments.

Pension reform is critical for ensuring that the system can meet its
obligations to pensioners over the long run, and will also improve the
fairness of the system, both across the current generation of retirees and
between current and future retirees. Some pensioners with long contribution
histories stand to benefit from this reform.

At the peak in 2015, pensions absorbed 38 percent of the general government
budget expenditure, requiring state transfers to the pension system of 9.5
percent of GDP. Greece’s social support system was at that time heavily
centered on pensions that were extremely generous compared either to
salaries or to what retirees had contributed to the system while they were
working. The heavy spending on pensions, including on pensions for the
relatively affluent, left little room for direct support for the population
most at risk of poverty, including the low-income households and the
unemployed.

Why is the IMF concerned about the authorities’ plans to return to the
old system of collective bargaining?

One of the more important achievements in Greece over the past eight years
is a more flexible labor market, and a more competitive wage structure
following the 2011 collective bargaining reforms. The authorities always
saw these changes as temporary and now plan to reverse them, meaning that
the government will once again be mandated to extend the collective labor
agreements negotiated between representatives of employers and employees in
a particular sector or occupation, to all the workers in that sector or
occupation.

This will reduce labor flexibility and risk disconnecting wages from
productivity at the firm level, which does not bode well for bringing down
unemployment and enhancing Greece’s competitiveness in the euro area. It
will also limit the flexibility of firms to restructure, which remains
needed in light of the bank, tax, and social security debt overhang.

Can Greece’s banks now be considered healthy?

Greek banks were hit hard by the crisis. Following private sector
involvement in the context of the 2012 sovereign debt restructuring, Greek
bank assets lost value. This loss in asset value was exacerbated by bank
borrowers that simply were unable to service their loans and strategic
defaulters that took advantage of debtor protection amid an ineffective
judicial system to stop servicing loans that they were actually capable of
repaying. Combined with the sharp deposit outflows in the first half of
2015, this has sharply limited banks’ ability to provide new lending.

On a positive note, there has been a gradual improvement across key
dimensions, including overall liquidity, asset quality, and governance.
However, banks’ portfolios continue to shrink, with negative consequences
for lending, and substantial further work is required to restore full
confidence in the financial system and revive banks’ intermediary role.

Importantly, the authorities have now strengthened financial sector
legislative and regulatory frameworks to facilitate resolution of
nonperforming loans. These tools should be put to work and remaining
restrictions on capital flows should be lifted in a prudent manner
following the agreed roadmap.

Greece’s reform program is ongoing, so what benefits can Greece expect
once these reforms are implemented?

Greece needs higher, more inclusive, and sustained growth. Since Greece
faces a very difficult demographic transition—an aging and shrinking
population that will translate into a smaller workforce—it must do even
more to enhance labor force participation and productivity, and attract
investment.

We expect the full benefits of existing reforms to materialize gradually,
but sustained reform efforts, including beyond those in the pipeline, will
be needed for Greece to attract more investment, create more quality jobs,
and afford better social protection.

Steadfast implementation of reforms will gradually improve the prosperity
and welfare of the Greek population, making the Greek economy more
resilient to shocks, and closing the gap with euro area partners.

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